One of my neighbours is a retired bureaucrat, who lives his life well — thanks to his habit of saving and investing. The 75-year-old owns the house he lives in and enjoys a somewhat frugal lifestyle by today’s standards, but a comfortable one. He earns a monthly pension, as well as some returns on his investments. His worry is not his corpus or his income, but his falling ill. He wants to know how he can fund his medical bill, without falling back on his children.
Retirement planners’ advice is overtly about building an adequate corpus, protecting it after retirement and generating a steady income from the accumulated amount. But there are more facets to a retired person’s portfolio.
Senior citizens may want a strategy of using some assets that they have created. In their early years of retirement, they may like spending time to pursue their interests — such as travel — that require funding. They may want to know the wealth they need to keep, and the drawdown for their use. It does not make much sense to pass on the wealth they have created to the next generation without enjoying some benefits in their lifetime.
We often hear stories of aging parents being harassed by their children for the lure of property. Many may have little scope to realise the money out of their assets during their lifetime. Others may worry about outliving their assets, and therefore, become conservative about spending the capital. Retirement planning, therefore, needs a strategy for using the capital judiciously. A graded drawdown that spends 10 per cent of the capital after 70 years of age, and increases it to 50 per cent by 85 years, may balance the use of the capital during and after one’s lifetime.
Most senior citizens living today did not have the privilege of buying a health cover to help them in retirement. Retirement planners advocate buying a cover, apart from what is offered by employers, during one’s earning years. But this may still fall short of post-retirement needs, since renewals are unavailable or are too expensive when a record of illness is built after retirement. Some amount of self-funding of medical bills is to be expected and planned for retirement. The asset allocation in the portfolio holds the key to do this efficiently.
The choice of asset classes and the trade-off inherent in them is different for a retired investor. While equity is liquid- and growth-generating, it is not a fit asset for emergency funding. The market prices may not be favourable when the investor seeks funds. Loan against equity may add to the risk in a retired investor’s portfolio.
Bank fixed deposits, designed to mature at frequent intervals, may serve his/her need for easy access and withdrawals better. The assets of a retired investor need to balance the need for income, offer an element of growth as a cushion for inflation, and feature high levels of liquidity to meet emergency funding needs. His/her portfolio, therefore, needs active management to meet these three objectives.
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Most retired investors choose an asset allocation that simply invests their corpus in a range of instruments that generate income. They are happy to live in their own house to enjoy the security it offers. The limitation in this allocation is the inability to sell portions of the house to meet medical expenses, as my neighbour has realised.
Asset allocation for senior citizens needs active management that keeps their needs in mind. A rule-based dynamic allocation can serve these needs efficiently, without taking a ‘call’ on markets. Investing in equity, but periodically withdrawing the funds to keep in debt or deposits, is a useful technique to keep appreciated asset value in a liquid and safe form.
Splitting up large investments into smaller chunks enables an effective drawdown of capital. Recasting the investment in property and reducing it to 50 per cent of the portfolio, will help meeting the 50 per cent drawdown need of the investor. Unfortunately, my neighbour is old to engineer this change in allocation. But the 15 years he had after his retirement were long enough to get his allocation by the time he was 75, if a planner had taken charge of his assets and their management, with this goal in mind.
The writer is managing director, Centre for Investment Education and Learning. Views expressed are her own